Thursday, December 31, 2009

The hidden transition to ever-higher systemic risk was the major story of 2009: nothing's been fixed, and the risks of systemic failure are rising every day.

On this last day of 2009, I want to address what I call the transition to risk.

One analogy is the way that the risks of suffering a fatal heart attack rise in a completely hidden way. The body doesn't signal the slow accumulation of fatty deposits in arteries; the process is silent. Nor is there any conscious awareness that arteries are hardening. The accretion of risk is slow, steady, invisible--until it's too late.

Some transitions to risk are highly visible. If you're driving on winding mountain roads and suddenly enter a thick fog bank which cuts your visibility to a few feet, the risks posed by continuing at high speed skyrocket.

The prudent person slows down or even pulls well off the road; the imprudent person ends up a statistic.

Then there are situations in which risk is building but someone with anasymmetric stake in the game convinces everyone the risk remains low to serve their own needs.

The boat is leaking, the winds are rising, but the skipper's profits require completion of the passage. So he reassures the nervous passengers that everything is fine, the weather is actually improving, and the ship's pumps can easily handle the leaks.

In an economy with a mainstream media controlled by a handful of corporations and a government financial policy in the hands of a few secretive manipulators, this "reassurance" comes in the form of blatant propaganda.

The number of jobless workers continuing to claim benefits, meanwhile, dropped by 57,000 to 4.9 million, also better than the increase that analysts expected. This supports the "headline" propaganda: "Jobless claims fall unexpectedly as layoffs ease."

But the propaganda/disinformation masks the reality that it's actually 10 million people who are receiving benefits, and that number increased by 200,000:

But the so-called continuing claims do not include millions of people that have used up the regular 26 weeks of benefits typically provided by states, and are receiving extended benefits for up to 73 additional weeks, paid for by the federal government.

About 4.8 million people were receiving extended benefits in the week ended Dec. 12, the latest data available, an increase of 200,000 from the previous week. The rise is partly a result of another extension of benefits by Congress in November.

President Obama earlier this month signed legislation that continues the extended federal benefits for the first two months of next year. That will prevent about 2 million jobless workers from running out of benefits in January and February, according to an estimate by the National Employment Law Project, a nonprofit group.

Tennessee saw the largest decrease in initial claims, 2,972.

So in a state with over 6 million residents, the "good news" which "proves" the economy is "rebounding" is that the "headline initial claims" number decreased by 3,000 people? This number is so small that it is in essence statistical noise. And since we weren't told how many citizens of Tennessee transitioned to extended benefits, for all we know the truth is that the number of unemployed people in TN actually rose substantially.

How many people are unemployed but not receiving benefits? How many are seriously underemployed, barely scraping by on reduced hours or gutted customer contracts? By the Bureau of Labor Statistics' own estimates, this number is over 9 million. Why the real unemployment rate is far higher than the official one. (This is one of my stories over at AOL's Daily Finance site.)

Toss in absurd "adjustments" such as the assumption that small businesses hired 1.2 million people that aren't counted in other surveys, and you get a real unemployment/underemployment number which is roughly double the "official" 10%.

"Ladies and gentlemen, this is Captain Smith speaking. The Titanic is officially unsinkable, so while the crew clears the ice from the fore deck, go back to sleep or resume your entertainments."

By borrowing trillions of dollars and using those taxpayer funds to prop up a failed banking/speculative finance sector, the Treasury and the Fed have greatly increased the risk of systemic failure.

Every day that the Federal government sells tens of billions of dollars in new debt-- and rolls over all the trillions of short-term bonds which are maturing--the risks of rapidly rising increases rates increases.

Rising rates would destroy the housing market by raising the costs of mortgages. They would undermine the entire shaky regime of "cheap easy credit" which props up not just the housing market but the entire economy.

Every day that the Federal, State and local government apparatchiks dissemble, obfuscate, and kick the can forward, their legitimacy declines and the concurrent risk of systemic failure increases.

Every day the mainstream media prints/speaks/distributes propaganda under the guise of "official statistics" and "news," it loses legitimacy and adds to the risk of public outrage when the constant reassurances are all revealed as false.

While the official line of propaganda is that the "recession ended in August or September," the reality is the systemic risk rubber band has simply been stretched to an unprecedented point of stress. In their supreme arrogance and hubris, Geithner, Bernanke and Co. are confident (or at least publicly so) that they can manipulate the smoke machines and the mirrors indefinitely.

2010 will be the year the rubber band snaps and their arrogant confidence will be revealed as the empty tricks of conjurers.

Beneath the superficial reassurances and the ginned up statistics, risk has been building, slowly but relentlessly. The transition from low to high risk has been visible to those who refuse to be lulled to sleep by the official assurances. While no one knows when the rubber band will snap, those who have watched the systemic risk rise are confident it will break. Will the smoke-and-mirrors work for another year? Perhaps. But the rubber band is already refusing to stretch any more, despite the stupendous pressure being applied by the Fed and Treasury.

Betting the rubber band will stretch another year is a very high-risk bet.

NOTE ON THE SURVIVAL+ BOOK: I am reformatting the interior for improved readability, so the book will not be available for the next few days. Your patience will be rewarded with a new cover and more readable text.

The chart plots a real estate-based stock index (red line) and an index of property prices (white line). Clearly, the stock index leads the property index; the stock index topped out a few months before property prices plummeted.

Rather ominously for China real estate speculators, the stock index topped out in July 2009 and is carving out a lower high.

China's real estate market is different from the North American market in several fundamental ways.

1. As correspondent Mike D. (writing from Harbin) recently reminded me, home ownership in China (85%) is much higher than it is in the U.S. (69% and falling). The reason is simple: the Central Government transferred ownership of most occupied dwellings to their occupants a generation ago, when the leadership chose a path of State-controlled "command capitalism with Chinese features."

Occupants paid a small sum for their home, and thus they were given instant equity.

The Central State retains ownership of all land in China; everyone gets a 99-year lease.

2. As Mike D. noted, such a gigantic transfer of equity and property from a Central State to its citizenry is unprecedented, and thus any attempt to forecast the long-term consequences has little historic precedent for guidance.

3. As a result of this transfer of ownership, most Chinese families had a very low-cost ownership stake. This enabled families with multiple wage earners and/or middle-class incomes to save (by Western standards) an extraordinarily large percentage of their net income.

4. Until recently, most Chinese paid no income tax, and even now, only high-income citizens are expected to pay (how many actually do is unknown/questionable).

5. There are no property taxes in China, so the cost of owning an empty house or condo is very low. Our friends own a spacious condo in Suzhou, about 90 minutes west of Shanghai, and their monthly condo maintenance fees are around $20 per month--a far cry from the $300 to $400/month (and up) paid by U.S. condo owners.

6. Many Chinese lost money in the insane Chinese stock market bubble which popped in 2007, an experience that was akin to the Nasdaq dot-com bubble and decimation in the early 2000s. Since stock ownership was restricted for decades, this "first taste" reinforced the view that stocks were highly risky and undoubtedly manipulated. Real estate is thus widely viewed as a "safe" investment.

7. Even though real estate cratered along with stocks in the global financial meltdown, Central Government stimulus and "quantitative easing" (flooding the country with easy to borrow money) has engineered a rebound, fueling a complacent sense that "real estate never goes down."

8. The re-sale market in China is very thin; there are few sales of "used" (existing) homes because the supply of brand-new homes is vast. Also, since people buy condos as long-term investments akin to savings, there is little "flipping" for short-term gain.

Add these factors up and you get exactly what you see everywhere in China: a massive over-building of luxury dwellings and households owning multiple high-end dwellings as investments. Many (if not most) are empty because the costs of ownership are so low and finding renters is either not "worth the hassle" or difficult due to the huge oversupply of luxury units and feeble demand from high-income renters.

Contrary to received wisdom, there is little unmet "organic" demand for housing in China, especially the luxury market. The demand for millions of luxury units is mostly speculative and has virtually nothing to do with "organic demand," i.e. people who want a place to live.

The past 20 years of rapid growth has convinced many residents that the boom in property values will never stop, i.e. it is a permanent feature of the Chinese economy that you can buy a luxury condo today and it will be worth a lot more in five years. This appreciation is basically "guaranteed" by easy credit, risign wealth, etc. etc. etc.

The situation has all the ingredients of a classic speculative bubble:

1. a complacent belief that the "investment" can never go down for long

2. a speculative market supported by cheap, easy credit and government policy

3. an oversupply of product generated to meet speculative rather than organic demand

4. a thin re-sale market which will plummet once selling begins

5. unsustainably rapid appreciation of assets due to speculative demand

This is how you get new unoccupied cities with thousands of units which have been sold as investments, as seen in this report: the empty chinese city

Can central planners somehow cool China's real estate market without popping what is clearly a stupendous speculative bubble? Has this feat ever been accomplished in the long history of asset/credit bubbles? The answer is no, so there is little to support the claim that "this time it will be different," and Maoxian's chart is offering up a warning to those who believe "real estate never goes down in China."

There is a wild-card in all this which no one ever mentions: a building is not electronic data or a gold coin. Buildings fall apart unless they're lived in and maintained; you can't leave a house or building, even a concrete one, sitting in the desert for 5 years and expect them to remain habitable just because they're "still new."

The unspoken reality which only those who live in China know is that buildings are not maintained. For the past 30 years, every building built 15 or 20 years ago has been torn down and replaced with something much grander. Thus maintenance has seemed superfluous; why bother when we all know this building will be torn down and replaced in a few years?

So what happens when the decades-long cycle of demolition and construction runs down? Millions of supposedly valuable long-empty dwellings will have little value as actual residences for two reasons: there will be an oversupply of luxury units and the wear-and-tear of weather and time will have reduced the livability of these buildings to near-zero.

But that is all a few years away. What China faces now is a massive imbalance between organic demand for luxury dwellings--people who can buy $600,000 condos in Shanghai to live there--and speculative, investment demand. History suggests all such speculative asset/credit bubbles pop. Given that the world looks to China for "growth," then we can safely predict that if China's real estate market sneezes, the entire world will catch a cold.

NOTE ON THE SURVIVAL+ BOOK: I am reformatting the interior for improved readability, so the book will not be available for the next few days. Your patience will be rewarded with a new cover and more readable text.

Tuesday, December 29, 2009

"Healthcare reform" is a pathetic facsimile of reform because it does nothing to address the structural causes of runaway costs. The system is careening toward insolvency and this "reform" merely hastens the coming systemic bankruptcy.

There are five primary reasons why sickcare (a.k.a. "healthcare") costs will bankrupt the nation as they spiral ever higher:

1. Sickcare costs are rising three times faster than the underlying economy, and have done so regardless of goods times or bad, or which party is in political power. This is unsustainable; sickcare will soon consume 20% of the GDP, on its way to 30%.

2. The sickcare system diverts ever greater sums of national income to a handful of cartels, in essence diverting trillions of dollars away from preventive medicine and public health and into for-profit private hands.

3. The "fee for service" model creates perverse incentives for phony billing, fraud, needless tests and procedures and sky-high charges for generic items, i.e. the $100 aspirin and the $2,000 "recovery room" (patient sits in a chair for a few minutes. I know about this because my 80-year old Mom was recently billed over $13,000 for a one-hour out-patient procedure on her toe; the bill paid by Medicare included this absurd "recovery room" charge, among other insane fees. Of course no one complained; the procedure was "free.")

4. The "employer-pays" model distances the end user (patient) from the actual costs and eliminates the only sustainable limit on spiraling costs, competition. When services appear "free" then they are naturally abused. When the consumer has no knowledge of the actual costs and no real choice on where to spend their money, then responsibility goes out the window along with competition.

5. As small businesses are burdened with these skyrocketing sickcare costs, they either stop hiring or are crushed out of business. The nation's economy is thus destroyed from within by the uncontrolled costs of sickcare which funnels ever-larger sums to private cartels even as the nation's health continues declining.

The present generation of Americans is the first in history with shorter life expectancies than the previous generation. This shocking reality should be sparking a revolution but instead the same old cartels are essentially writing legislation which continues feeding trillions to the cartels while ignoring public health and the causes of the nation's declining health. (See yesterday's entry for more on that: Why "Healthcare Reform" Is Not Reform, Part I )

There is a competitive, low-cost healthcare system around--it's just not in the U.S.Clinics in Mexico, Thailand and India provide dental, cosmetic and other procedures for 10% or 20% of the cost in the U.S. This so-called "medical tourist" trade is expanding rapidly, and since the care is generally on par (or better) than that offered in the U.S., U.S. insurance companies are wising up and sending patients overseas.

When employees can't get fired, their level of service can drop to near-zero without consequences. I have heard so many horror stories of abysmal care in U.S. clinics and hospitals (yes, alongside stories of superb care) and seen enough to grasp the uneven quality and lack of competition in the U.S. sickcare system.

The arrogant assertion that "the U.S. healthcare system is the finest in the world" is only true if you're a congressperson or equivalently privileged being. If you're a mere citizen, it's more like a lottery in which losers end up with care much worse than that available for cash in Thailand and India. (I've been to the big "medical tourism" hospitals in Thailand: the service and facilities are equal to anything I've ever seen in the U.S. You don't have to wait, the employees are actually attentive, and of course care is actually affordable.)

I think it is self-evident that it's the U.S. which has "third world" medical care. This is not a slam on overworked U.S. healthcare workers, many of whom are tasked with the impossible by a system which is ruled by perverse incentives. It is simply a statement about a system in which competition, patient responsibility/control (yes, they go together) and transparency play no role whatsoever.

I have witnessed hospital staff--not one or two employees, but entire floors-- which went through the motions of "providing care" in between gossiping with co-workers. I have waited hours for some staffer to become "free" from his/her crushing schedule to go get a wheelchair from another floor. (If everyone is so busy, why are they standing around so much?) If this is "first world" care, then I'll take so-called "Third World" cash-only care in Thailand any day.

Let's talk about a forbidden topic: responsibility. So-called "medical insurance" (it's so-called because we all get sick and die, so how is that "insurance"? It's not like we're insuring against the risk that one house in a hundred may burn down) has a peculiar trait: responsibility plays no factor in its cost.

If you ignore traffic rules and behave recklessly while operating your vehicle, your auto insurance will rise very quickly to match the risks created by your behavior. Eventually you will be unable to get insurance and will not be able to drive legally. This is common-sense and no one complains that the system is "unfair."

Yet if you recklessly drink and smoke and eat to excess, without regard for basic rules of "operating" your own body, then it's your "right" to get cheap insurance coverage without regard for your own conduct in the matter. Even mentioning this is verboten; why?

Medical care also has a peculiar trait: nobody can tell you what it costs. The actual costs are opaque, obscure, or simply unknown until the bill is printed. How can anyone effectively compare costs and services when the system has no transparency?

The central tenet of the Survival+ critique is that no problem can even begin to be solved without an integrated understanding of the interlocking chains of causality which create the problem. So what does this mean in this context?

Once you remove all responsibility, transparent pricing and competition, then you have also eliminated all patient inputs and all controls on costs and quality. The patient's "choice" is effectively reduced to a phony simulacrum of choice: which member of the insurance cartel would you like to "choose"?

This is "impossible" because it places responsibility and control completely on the citizens themselves and creates an open market for services. Just as in totalitarian states dominated by State propaganda, "responsibility" and "competition" have been elevated to the state of supreme emptiness. They are worshipped because they no longer exist to threaten the status quo.

If reform were not a facsimile, the first step would be to strip the power of the sickcare, agribusiness, pharmaceutical, fast food, etc. etc. cartels to shape policy and control the media. Educating the public rather then enabling cartel propaganda would be a good second step, along with making the citizenry responsible for their own health once again rather than cede it to the Savior State and its "private partners," the cartels.

Monday, December 28, 2009

"Healthcare reform" is a simulacrum reform; beneath the public relations, it does nothing to challenge the status quo "sickcare system" which is impoverishing the nation even as the health of the citizenry declines.

There are two fundamental reasons why the "healthcare reform" which passed the U.S. Senate on Christmas Eve is a simulacrum of reform: it does nothing to lower cost or limit the diversion of national wealth to a few cartels, nor does it address the food-diet-nutrition-lifestyle causal chains which are dooming the nation to an explosion of preventable chronic disease and diminishing lifespans.

Here are two documentaries you need to see: Borrow, rent, or buy, whatever it takes, but see these:

The central tenet of the Survival+ critique is that no problem can even begin to be solved without an integrated understanding of the interlocking chains of causality which create the problem.

In the U.S., healthcare costs are exploding for a number of powerful reasons, but the most important one is the deterioration of the citizens' health which can be causally traced to the nation's deteriorating food supply, diet, nutrition and fitness--all integrated parts of a massively unhealthy lifestyle.

While we don't know everything about human health, of course, we do know that extra weight (obesity) and lack of exercise are causally linked to a number of interlinked chronic diseases, all of which lead to early death (Diabetes, high blood pressure, heart disease, cancer, etc.).

The obesity epidemic can be viewed visually via this slideshow map of the U.S. I recommend you view this slideshow which depicts the obesity epidemic on a state-by-state basis:

Here's a chart of global obesity (BMI is not a perfect metric, but this certainly suggests some obvious conclusions)

Some question whether poor diet, excess weight and inactivity actually increase healthcare costs; this chart from the State of Minnesota shows that inactivity does have costs.

The terrible truth is that the "sickcare" industry, agribusiness, and the fast-food/ packaged food industries all profit immensely from poor diet/ nutrition, widespread ignorance of the principles of human nutrition and health, and a media-obsessed, couch-potato lifestyle which demands "quick fixes" for complex lifestyle diseases.

The incentives are all entirely perverse. As an academic notes in King Corn: "We subsidize happy meals (TM), not healthy meals."

How much profit is there in raw broccoli or carrots? Precious little. How "good" does packaged and fast food taste without high levels of salt, fat and sweeteners? Not very.

The quality of the nation's food has deteriorated without our being aware of it. One of the old farmers in King Corn flat-out states, "We're growing crap."

An academic in the film observes of corn-fed cattle fattened in massive feedlots and kept alive with monstrous amounts of antibiotics: The typical American hamburger is a fat burger (65% of total calories are from fat) held together by some meat.

This was not the case 40 years ago. Two generations ago cattle were routinely grass-fed (so-called free-range animals) and then fattened up with grain for 60 days or so prior to slaughter. They ate grass for up to two years. Now they are taken as calves and fed corn for 150 days in confined areas and then slaughtered.

Which animal do you reckon is healthier for you to eat?

As I describe in Survival+, a key way the status quo maintains power and control is by making history, even recent history, largely inaccessible.

Another subject of the film was a gentleman who drank a liter or two of soda every day which was sweetened with high-fructose corn syrup. Not too surprisingly (or perhaps it was a surprise to him?), he ballooned up to 300 pounds and became diabetic.

Let's ask of this "healthcare reform bill" which will direct 16%-20% of the entire nation's GDP to a handful of cartels: how many of the trillions of dollars will be directed to educate American kids over the course of not a semester, but over a decade of integrated curriculum, about diet, nutrition, fitness, cuisine and the responsibility they have for their own health?

Essentially none. An educated public is one which might shy away from fat-burgers, liters of soda and other extremely profitable products hawked by the food industries.

The sad truth is that there is essentially no profit in helping people stay healthy and immense profit in managing their chronic diseases. Yes, "defensive medicine" (ordering needless tests and medications by the boatload to fend off future lawsuits) is a factor, and so is the insanity of paperwork (by some estimates, 40% of the entire $2.4 trillion sickcare system is squandered on paperwork and fraud).

But we have to face the reality that the system incentivizes chronic illness (the fee-for-service model) and a growing multitude of questionable tests, drugs and procedures and offers radically perverse disincentives for helping people stay healthy. There is literally no way to charge a fat fee-for-service for helping people stay healthy.

A large number of healthcare professionals (RNs and physicians) read this blog (I am not sure why, but I am honored by their readership and insights). Thus I am aware of the "dirty little secret" known to healthcare professionals: the standard-issue American patient takes little to no responsibility for their own health. They demand a prescription for the medication they saw advertised every half-hour on TV, they want an antibiotic for their cold, even after being told viruses do not respond to antibiotics, they resist stopping smoking, entering AA to address their alcoholism, etc.

So what does this "healthcare reform" do to increase the level of knowledge and responsibility required of a free people? Nothing.

There is only one thing we know for sure about the U.S. sickcare system, "reformed" in this fashion: it will bankrupt the nation within the decade.

The truly sad thing is that it doesn't feel good to eat unhealthy food and sit around in unfit torpor; chronic diseases are terrible burdens, and people are needlessly losing years off their lives. The sad thing is that this "reform" by the Powers That Be is a mere simulacrum, an elaborate facsimile of the real reform we need to not just lower costs but improve the health of the nation's citizens. Shouldn't that be the goal?

If that truly was the goal, the first step would be to strip the power of the sickcare, agribusiness, pharmaceutical, fast food, etc. etc. cartels to shape policy and control the media. Educating the public rather then enabling cartel propaganda would be a good second step, along with making the citizenry responsible for their own health once again rather than cede it to the Savior State and its "private partners," the cartels.

Thursday, December 24, 2009

Interest rates, artifically suppressed by the Federal Reserve and China, are about to start rising, and will continue rising for a generation.

On Christmas Eve 2009, I wish I could parrot the "happy-happy" Party Line that interest rates and mortgage rates will stay low for essentially ever, but that would require lying. The truth is the drivers of super-low interest rates are diminishing, and the forces of higher rates can no longer be restrained.

There have two primary drivers of super-low interest rates: The Federal Reserve and the Chinese buying Treasury bonds.

The Fed has created massive artificial demand for more U.S. debt in two ways; by direct purchase of bonds being auctioned (During the first 2 months of the new fiscal year, the Federal Reserve grew its balance sheet by about $65 billion, in effect purchasing about 22% of the federal government’s new debt) and by secretly buying Treasury bonds from "primary dealers" (banks) a few days after the auction.

This way, it appears for propaganda purposes that some private parties are actually buying T-bills to hold, when in fact they are only temporary proxies for cloaked Fed purchases.

The entire "package" of Fed buying of Treasury debt to keep interest rates low runs in the hundreds of billions--The Fed’s balance sheet ballooned to $2.24 trillion in assets as of last week, up 142 percent from the beginning of 2008. The Fed purchased outright $300 billion of longer-term Treasury securities, $1.2 trillion toxic-garbage mortgage backed securities no sane investor would touch, and hundreds of billions more in Treasury debt via proxy buyers.

And now as the Fed ends some of its lavish support of the Treasury debt, Congress and the Obama Administration are stepping up their borrowing to unprecedented levels:

Here is the key dynamic to China's purchases of Treasury debt: when China's trade surplus with the U.S. was expanding into the hundreds of billions every year, the Chinese needed a place to park all those dollars. U.S. Treasury bonds were liquid, supposedly safe and available in limitless quantities.

But now the gargantuan trade surpluses are shrinking, and the torrent of dollars has diminished. Standard-issue financial pundits (SIFPs) have been cheering the declining U.S. trade deficit, but they should be careful what they wish for: once the U.S. is no longer running a huge trade deficit, then all those exporter nations will no longer have hundreds of billions of dollars floating around, looking for a home in Treasury bonds.

According to China's General Administration of Customs, China's exports from January through October dropped by 20.5 percent compared with the same period last year. During the same period, its export volume to the US dropped by 11.3 percent, while the export price declined by 5.3 percent.

China's trade surplus with the U.S. was US$24 billion in October, compared with $13 billion in September, bringing the total for the year so far to $159.23 billion.

Bilateral trade with the U.S., China's second-biggest trading partner in the period, is down 14.8% in the first 10 months this year, to $239.36 billion. Two-way trade with close neighbor Japan, China's third-largest trading partner, has crashed 19.3% in the period, to $182.34 billion. Business with the European Union, China's biggest trading partner, has suffered almost as badly, declining 18.7% in value to $292.42 billion.

China holds about $2.27 trillion in foreign reserves, about two-thirds of it in US dollars, up 19% from a year earlier. The country held Treasury bills worth about $797.1 billion in August, making China the world's largest holder of US Treasuries outside the United States, according to the US Treasury Department.

In addition to having fewer dollars to park in T-bills, China has (as noted above) started trimming their holdings of long-term Treasury debt.

OK, let's add this up: the two primary sources of demand for new Treasury debt are scaling back or even dumping their holdings, while supply of new Treasury debt is increasing at record levels.

According to the laws of supply (increasing rapidly) and demand (falling), the Treasury's ability to palm off hundreds of billions in new debt every few months is about to outstrip demand by a long shot.

The only way to increase demand will be to raise interest rates, which will then spread to all layers of the economy. All interest rates will rise, including mortgages.

There really is no escape from this conclusion. And this isn't just about 2010--it's about 2010 through 2035, as bond rate cycles tend to run between 18 and 26 years. Just as interest rates fell for 26 years, now they will rise for a generation or so.

Short-term Treasury yields fell to near-zero in the global financial meltdown, but the basic idea of this chart remains valid: interest rates fell as Chinese ownership of U.S. debt skyrocketed. Once that ownership starts falling (along with Fed purchases), interest rates have nowhere to go but up for decades to come.

For those who think the newly frugal American household or corporation will step up and buy the $1.4 trillion in new debt and the $2 trillion in debt being rolled over each and every year--dream on. According to Niall Ferguson in An Empire at Risk:

Unfortunately for this argument, the evidence to support it is lacking. American households were, in fact, net sellers of Treasuries in the second quarter of 2009, and on a massive scale. Purchases by mutual funds were modest ($142 billion), while purchases by pension funds and insurance companies were trivial ($12 billion and $10 billion, respectively). The key, therefore, becomes the banks. Currently, according to the Bridgewater hedge fund, U.S. banks' asset allocation to government bonds is about 13 percent, which is relatively low by historical standards. If they raised that proportion back to where it was in the early 1990s, it's conceivable they could absorb "about $250 billion a year of government bond purchases." But that's a big "if." Data for October showed commercial banks selling Treasuries.

That just leaves two potential buyers: the Federal Reserve, which bought the bulk of Treasuries issued in the second quarter; and foreigners, who bought $380 billion. Morgan Stanley's analysts have crunched the numbers and concluded that, in the year ending June 2010, there could be a shortfall in demand on the order of $598 billion—about a third of projected new issuance.

Of course, our friends in Beijing could ride to the rescue by increasing their already vast holdings of U.S. government debt. For the past five years or so, they have been amassing dollar--denominated international reserves in a wholly unprecedented way, mainly as a result of their interventions to prevent the Chinese currency from appreciating against the dollar.

At the peak of this process of reserve accumulation, back in 2007, it was absorbing as much as 75 percent of monthly Treasury issuance.

So if the Fed and Chinese cut back, due to not having more dollars to squander on T-bills or from various other constraints, then the pressure to sell Treasuries at whatever the market demands could cause rates to explode higher, to the surprise of virtually all observers.

Except Jesse and us, of course. We will only be surprised if they can keep the game going much longer.

Things are getting more and more complex in today's world. That is a statement few would doubt.

However the question is why. Is it necessary? Is it always necessary? How many people can keep up with changes and understand them? How can democracy / any form of participation still work if the majority doesn't even understand the broad overview anymore?

Wednesday, December 23, 2009

The bail-out of Wall Street and the banking and mortgage industries is not monetary policy; it is a massive transfer of wealth from future taxpayers to the Financial Power Elite.

The monetary-policy terminology of "quantitative easing" and "bail-out" is a masterstroke of propaganda, for it purposefully masks an unprecedented transfer of wealth from future taxpayers to the Financial Power Elite.

I want to be crystal-clear here: what Bernanke & Co. represent as "monetary policy" is in fact a massive transfer of wealth from future generations of U.S. taxpayers to Wall Street and the banking/mortgage industries.

The propaganda is purposefully designed to distract our attention from the fact that "monetary policy" has fiscal consequences for future taxpayers--unprecedented mountains of Federal debt which must be serviced over a generation in which interest rates will rise.

Various SIFPs (standard-issue financial pundits) are trotted out as shills to support "quantitative easing" and "bail-outs" as "sound monetary policy" to ward off Depression. Yet what did squandering $1.2 trillion on toxic mortgage-backed securities actually gain the nation? What did squandering several trillion dollars on bailing out AIG, Wall Street, the banks, Fannie and Freddie, GMAC, etc. etc. etc. actually gain the nation?

Perhaps the only "depression" that was averted was the depression the Financial Power Elite would have experienced had their empires of leverage and derivatives been allowed to fall, eradicating their ill-gotten wealth in the process.

The goal of propaganda is to redirect attention away from the truth via misinformation and the construction of plausible, emotionally appealing facades--simulacra in the Survival+ analysis.

Thus the transfer of trillions from your childrens' future earnings is masked behind the seemingly harmless and cost-free facade of "monetary policy."

Another Survival+ concept in play here is complexity fortress. Bernanke and Co. have constructed a complexity fortress, hiding their actions behind veils of secrecy (all "for the good of the nation," heh, as if transparency was the enemy of democracy and free speech), obfuscated transactions (purchasing futures contracts via proxies, and so on) and the sheer complexity of structures such as TARP.

If the web is too tangled for anyone but insiders to understand, then the complexity fortress is complete and invulnerable.

This was of course a favored strategy of Wall Street--derivatives so complex that only those who wrote them understood the risks.

There is another facet to this propaganda campaign of masking fiscal burdens on citizens behind the bland mask of "monetary policy": the complete destruction of integrity and ethics in the halls of power.

Ethics receives lip service in the U.S., of course, along with other fictions such as "fiscal responsibility," but that faint bleating is itself a sort of veil over the bleaker reality that integrity and ethics have been entirely marginalized in the public culture of the nation.

Were anyone to actually resign in protest or disgust, they would be cynically castigated for throwing away wealth and power in a needless gesture. As for ethical breaches-- everyone knows a phony apology ("I am sorry I hurt my family and my wife, I take full responsibility, blah blah blah") is all that's needed. After a brief pause to allow the news cycle to wander past, they can resume the pillaging of the public coffers, the fraud, embezzlement and legerdemain that have been raised to a state of perfection in the halls of power.

In other words: integrity is for chumps. This marginalization of integrity, both institutional and individual, is a key element in the Survival+ analysis.

Thus we have Bernanke & Co. stand before us with straight faces, even as they know their policies are enriching the few at the cost of the many taxpayers who are safely in the future. That we as a nation are stealing from our children and grandchildren to avoid any housecleaning now--that doesn't bother Bernanke & Co., nor does it bother the senators who are biding their time, awaiting the moment where they rubber-stamp the pre-approved apparatchiks.

This marginalization of integrity in the halls of power has infected the entire nation; those below look up and see fraud, corruption, lies, propaganda and self-serving aggrandizement, and they conclude that ripping off the taxpayer, pursuing fraudulent claims and mortgage documents, etc. etc. is in essence the "officially approved" manner to get ahead.

True to the high standards of propaganda which now pass as "normal," this erosion of truth and integrity in official statements, statistics and policies is vehemently denied by those in power.

The costs of this erosion cannot be tallied easily, but we can predict they will be paid out over many years, if not a generation and beyond.

Things are getting more and more complex in today's world. That is a statement few would doubt.

However the question is why. Is it necessary? Is it always necessary? How many people can keep up with changes and understand them? How can democracy / any form of participation still work if the majority doesn't even understand the broad overview anymore?

Tuesday, December 22, 2009

The symbiotic partners of "Chimerica" both present symbolic economies which mask the structural rot in their real economies.

I am indebted to Australian analyst John Craig of the Centre for Policy and Development Systems for the concept of a symbolic economy which is presented as "evidence" of "healthy growth." Behind the symbolic facade, the real economy is devolving toward structural implosion.

Such a substitution by the Power Elites/State partnership of symbolic prosperity for broad-based, real prosperity is what I term a simulacrum of prosperity in the Survival+ analysis.

For China, the symbolic economy is a highly suspect GDP growth rate of 8%, mostly fueled by stupendous Central Government stimulus and unprecedented borrowing. Correspondent B.C. submitted this article China May Have 8 Trillion Yuan in New Loans in 2010 (Bloomberg) and this commentary:

Lenders, under government pressure to finance part of the nation’s 4 trillion yuan stimulus plan, advanced a record 9.21 trillion yuan of new loans in the first 11 months, more than double the amount offered in the same period last year.

~30% of GDP for two successive years and 150% growth in two years?

This would be equivalent to the US expanding bank lending by $11T from '08 to '09-'10.

Assuming the bank loans/GDP ratio, US GDP would have been reported to have grown $21 trillion in two years.

The growth of China's lending is at a compounding doubling rate of 18 months. That's right, in 18 months.

This puts China's money velocity below 1.0 and the multiplier at ~0.9.

Virtually nowhere does one read in the financial press the full extent of the absolutely mind-blowingly extraordinary runaway credit expansion occurring in China. There is simply no precedent in modern economic history for a country to have expanded lending at such a rate and share of GDP in such a short period of time.

That all other more "modest" episodes throughout history resulted in the greatest bubbles and subsequent crashes in world history, we are potentially witnessing (without most of us knowing it, apparently) the prelude to a China crash that will become a financial and economic black hole into which the entire global economy is consumed.

There is absolutely NO WAY that bank lending doubling in 18 months can be prudently and efficiently intermediated.

This kind of growth of lending, production, and hoarding of commodities is akin to a full-out war mobilization effort; a kind of last surge of production and laying up of stores before the armor is put on; the women and children are safely put out of harm's way; the blades and arrow tips are carefully sharpened and honed; the breast is thoroughly beaten and war cries sufficient to summon the gods of war; the necessary sacrifices are made to the gods; and the gates of the fortress are flung open, and the well-fed dogs of war are unleashed upon the enemy.

Thank you, B.C. As noted elsewhere in the blogosphere, much of this gigantic flood of borrowed money has flowed into

1. questionable infrastructure projects

2. a massive expansion of capacity in industries which already have too much capacity

In the U.S., unprecedented Federal borrowing and bailouts have created a symbolic economy of the stock market rally and bogus "recovery" statistics.

Even as measurements of the real economy show structural devolution (tax receipts continue to plummet, incomes and hours worked remain at Depression levels, jobs are still being lost, etc.), the stock market's 70% rise is in effect the symbolic evidence that the "economy is recovering." Behind this symbolic facade, the real economy lies in ruins.

How can GDP be growing at a robust 3.5% clip (oops, already adjusted down to 2.7% a few weeks ago and now it's been adjusted down again to 2.2%) while employment and tax receipts are both falling? The answer: statistics are ginned up to support the symbolic economy of recovery, rising corporate earnings and a "new Bull Market" in stocks.

As a reader noted here earlier in the year, the stock market is the sole accomplishment of this administration and Congress. Without the "feel good" "New Bull Market," then the emptiness of the real U.S. economy would be in full view.

The Powers That Be might be questioned at that point, so a facade of "recovery" and a rising stock market are presented as a symbolic U.S. economy.

Things are getting more and more complex in today's world. That is a statement few would doubt.

However the question is why. Is it necessary? Is it always necessary? How many people can keep up with changes and understand them? How can democracy / any form of participation still work if the majority doesn't even understand the broad overview anymore?

"Borrowing trillions which leads to out-of-control price spirals will lead to national insolvency. There is no other end-state."

Harun also offered this explanation:

Any positive growth rate in the currency will result in a collapse of the currency. The rate may be stated at some seemingly benign level (2.5%) but that means the money supply doubles every 28 years, and does so until the amounts are staggering. This embedded feature of current economic dogma is never discussed openly by its practitioners and is not understood by the public whom they serve.

Health care and education spiraling costs are effects not causes. The price spirals are the result of destruction of the currency's purchasing power. Unfortunately, Washington is convinced that the "fix" is in government restructuring of these industries. It is because they either do not understand or willfully ignore the consequences of the exponential effect of expanding debt-as-capital that insolvency will occur. Insolvency will occur because due to the nature of exponential growth/collapse, by the time it is realized a problem exists, it is already much too late.

As longtime readers know, Harun has often shared an analysis based on purchasing powerrather than nominal valuations or concepts such as inflation/deflation, which so often end up further muddying rather than clarifying the measuring of our earning power and wealth.

For instance: take the value of the U.S. dollar (USD) in 1914, 1919 and now. According to the Bureau of Labor Statistics handy inflation calculator, a 1914 dollar equals $21.63 in 2009 dollars, while a mere five years later, the 1919 dollar equals only $12.50 in today's USD.

This raises a number of questions. Are we as a nation wealthier in terms of purchasing power and earnings than we were in 1914? In other words, even though today's dollar is only worth a nickel in 1914 money, can a citizen buy more FEW resources (food, energy and water) with an hour's labor today, despite the massive decline in the dollar's nominal loss of value?

Put another way: if a laborer earned 10 cents an hour in 1914 and paid no income taxes, and bread was a nickel a loaf, his/her purchasing power was 1 hour = 2 loaves of bread.

If bread is now $3 a loaf and a laborer earns $12/hour and pays $3 in income and Social Security taxes, leaving $9, then 1 hour = 3 loaves of bread.

Regardless of the nominal value of the currency, the laborer has greater purchasing power today.

Between 1914 and 1919, the dollar lost a staggering 42% at least measured nominally. (Recall that World War I lasted from August 1914 to November 1918.) Did wages rise 42% in those five years? If so, the rise in wages offset the decline in purchasing power of the dollar. If wages did not rise 42% (and while I cannot find any spreadsheet for those years, my sense is wages did not rise that much), then wage earners lost considerable purchasing power in those few years.

This could be phrased in a number of ways: if money supply growth exceeds GDP growth, then the currency loses purchasing power.

This is partly why discussions of "inflation" and "deflation" are so often fruitless.Clearly, "inflation" ate up 95% of the nominal value of the 1914 U.S. dollar. But if the purchasing power of an hour's wage rose, then what can we conclude?

If income/wages fall faster than deflation, purchasing power also declines.

The rapid decline in the dollar's value in the five years between 1914 and 1919 reveal how the real question is not how much did the nominal value change, but how did the purchasing power of wages change.

This focus on purchasing power, and on growing one's purchasing power, is a key focus of Survival+. (Yes, Survival+, once again.)

Here are Micah's comments, and the instructions you will find upon opening the spreadsheet:

I just finished reading Survival+ a couple of days ago, and I've been thinking about what you wrote about considering the value of assets in terms of how many loaves of bread you could buy with them. I thought about how hard it could be to visualize the development of purchasing power over time, and so I built the attached spreadsheet that I believe will make it easy for someone to see their own value in terms of FEW resources over time.

It should be easy for anyone with novice skills in Excel to use, and I think it will make it easier for the user to visualize the relative volatility of some FEW resources and to track whether or not they are actually becoming any wealthier as they accumulate money.

Instructions on using the spreadsheet: The only cells you need to fill in are the green ones. The cells at the top of the page are for assessing your own wealth in dollars; type in the amount of money you hold in each category (insert more categories as needed). They will automatically total below the column. Next fill in the current costs of the resources in the green row. The number of units of each resource that you could currently purchase with your total wealth will be automatically calculated in the yellow row. Next, paste the values from the yellow row (use Paste Special) into the row representing the current month, and your purchasing power in terms of each resource will appear in a chart on the tab marked 'Charts'. As you refill the green cells every month and update the charts, you will see your real purchasing power in various resources evolve over time.

Thank you, Harun and Micah. I am confident from our email correspondence that Micah considers this spreadsheet a work in progress. Feel free to play around with it as a way of escaping unfruitful concepts and exploring the measure of purchasing power.

Saturday, December 19, 2009

There are hundreds, if not thousands, of worthy books on the coming intersecting crises and how we can prepare ourselves to survive (and perhaps even prosper). I do not claim to have a comprehensive knowledge of all the competing titles, but I can recommend a few that are on my shelf, and list some titles which oftwominds.com readers (a very smart selection of The Remnant, as you know) have recommended.

This book covers not just emergency preparation but water issues (graywater, etc.), food growing, foraging and storage, shelter, first aid, "when high-tech medicine fails," clothing, energy, heat and power, metalworking and machinery, and much else. The book includes many resources for further investigation, diagrams and even sections on intuition and decisionmaking. It is a practical guide with what I call an integrated understanding of the choices facing each household.

My goal in writing Survival+ was to lay out the framework for understanding why the status quo is doomed to insolvency, and to lay out how the solution requires constructing new resilient communities and networks which are independent of global corporate and State plutocracies. There are few books which address this adequately, but there are many which focus on household preparation/sustainability. To list but a few:

The Modern Survival Manual: Surviving the Economic Collapsewritten by an Argentine, based on what he learned enduring/surviving that nation's catastrophic financial collapse. I have read his website/earlier work and found it practical though harrowing. Good for those who want to prepare for TEOTWAWKI.

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